Analyst: CRE Buyers Needed

It is safe for distressed commercial real estate investors “to go in the water. Yes, enjoy the swim,” said Mark Grinis, a partner in the real estate distressed services group at Ernst & Young.

But buyers need to have a reasonable outlook about their returns and they will need to time their entry into the market right, he told attendees at a National Mortgage News conference on distressed assets in New York, adding, “You will need to earn your returns.”

Buyers of distressed assets, he said, need to come up with a strategy that dovetails with where the distressed assets actually are. For example, notice of defaults on land loans peaked last year. Another asset class where NODs have peaked is in hotels. Grinis said those are the areas where buyers will be seeing lots of action. He said the market cycles of the past 10 years have not been representative of what is occurring, as the tech bubble and then the housing bubble have impacted the economy. Grinis continued he does not expect another bubble to occur.

Instead, the example that might be relevant is Japan and that country’s “lost decade” when it comes to the deleveraging process. However, the U.S. markets have corrected much quicker and are more transparent. But the direction, Grinis explained, is the same.

While the economic recovery has begun, real estate has typically lagged. He predicts that in the middle of next year is when there will be a real estate recovery.

Everyone expected to see a flood of distressed assets on the market, he said. But each lender is making an individual decision on when to sell and take a hit, and thus there is “no rush for the exits” and this has helped to keep prices up, Grinis continued.

Those that will be liquidating assets are most likely to be banks. Much of the commercial real estate assets are held by the large commercial banks and the regional commercial banks. He said there are different strategies on how to approach each type of seller.

Commercial mortgage-backed securities issuers lent a smaller slice of the pie, he noted. When his unit has a first meeting with a lender, it looks at the property’s marketability. Then transferability is considered. For lenders, the best strategy (and longest-term strategy) might be to stabilize the property and then sell it. But that strategy does not deal with any pressure the bank’s regulator is putting on the institution.

The next strategy is to do a structured transaction. In these situations, which can take two to four months to complete, 49% of the value of the asset remains on the bank’s balance sheet. His final option, and the quickest to accomplish, is a whole loan sale.

For those waiting for the Federal Deposit Insurance Corp. to dispose of assets seized in a bank failure, Grinis said the agency is a “good monetizer of assets.” He continued FDIC would be a good and stable seller.